Tom Westbrook

SINGAPORE, (Reuters) – Stocks in Asia remained steady Wednesday after Shanghai emerged from two months in lockdown. A dip in oil prices dangled a possibility of a respite for rising energy prices. However, investors and bond market participants were nervous about the impact of inflation.

Inflation in the eurozone rose by 8.1% in May as a result of rising energy and food costs, according to overnight data. The record was well above market expectations and has sparked concern over rate hikes in Europe and globally.

As investors sold out, two-year German Bund Yields hit their highest levels in over 10 years. The benchmark 10-year Treasury yields rose by 10 basis points (bps), and increased 2.5 bps to 2.78499% in the Asia session. [US/]

MSCI’s Asia-Pacific share index outside Japan was 0.1% lower and rose 0.5%.

The index dropped 0.6% Tuesday and bounced 0.5% on Wednesday. After sliding in May’s second half, the U.S.dollar has stabilised and it gained slightly in trade early Wednesday against the euro. [FRX/]

On Wednesday, the U.S. Federal Reserve began reducing assets that were built up in response to the pandemic and traders anticipate it will increase rates by 50 basis points at its meetings next month.

Kit Juckes (OTC:), analyst for Societe Generale, stated that “Markets are pricing rates hikes in June in the UK, U.S.A, Sweden, Australia, and Canada.”

Markets will focus more on inflation data and central banks’ actions, which means that it’s more likely we’ll have a slow start to summer risk sentiment. However, this could be a good thing for the dollar.

Bank of Canada expects to increase its benchmark target rate from 50 bps up to 1.5% at later hours.

The first quarter of Australian economic growth was slower than forecast, according to data released Wednesday. However, it showed that domestic demand did a better job than expected. This sets up the conditions for higher interest rates.

POINTIVES

Investors’ fears were eased by a slight pullback in oil price overnight and the possibility that China’s slowdown is nearing its peak.

After two months of despair, frustration and economic loss it was finally over.

In the old French Concession, small groups shouted “ban lifted!”

On Tuesday, Chinese factory activity data was released for May. It wasn’t quite as severe as traders expected.

Analyst Sean Callow from Westpac said that “compared to just a few weeks ago, it is a clear positivity for sentiment”, adding however that inflation was one of the “clear positives”.

Stocks in Shanghai and Hong Kong held on to gains from Tuesday and opened stable.

The dollar was in cautious mode and its three-week slide has stopped. On Wednesday, it was at an all-time high of 128.18 Japanese yen and rose 0.2% for $1.0709 per Euro. It hovered around $0.7172. [AUD/]

After the Wall Street Journal published that Russia might be excluded from a production contract, oil prices dropped on Tuesday. It opened the doors for countries in the Middle East to expand their output.

Futures declined from the three-month record and settled at $116.18/barrel as of last week.

A fraction less than $1,834 per ounce was achieved by a stronger dollar. Early-week gains of $31,838 were maintained.